All posts tagged European Central Bank

Today is the anniversary of gold’s historic rise to a record-high price of $1,920 a troy ounce. In true style, the metal is celebrating with a hefty rally.

For the first time in six months, the price is gold is above $1,700/oz, a level that the metal has been struggling to breach for several sessions. The catalyst for this move higher? Speculative buying amid hopes for imminent central bank stimulus.

Twelve months ago, the gold market faced similar circumstances. Expectations for a third round of quantitative easing from the U.S. Federal Reserve were high and the euro-zone debt crisis dominated headlines. Combined, these played into the hands of gold, which gains favor as a hedge against currency weakness and inflation at times of loose monetary policy, but is traditionally sought as a store of value at times of elevated economic risk.

While gold has recently shrugged off its traditional ‘safe haven’ label to some degree, the attitude of investors to potential central bank stimulus remains the same: further easing means higher gold prices.

Thursday sees a much-anticipated policy meeting by the European Central Bank. As well as announcing an interest rate decision, the ECB is expected to consider a plan to buy an unlimited amount of government bonds with maturities of up to three years, as part of its strategy to fix the euro zone's financial markets.

“The questions now are whether the market will deem [that] Draghi's plan is workable and goes far enough to make a meaningful difference and secondly to what extent have the markets already discounted this,” said William Adams of FastMarkets.com.

Is the European equity market's huge rally of the summer justified? And, perhaps more importantly, is it likely to be sustained?

My view is “possibly” and “probably not”, in that order.

Spain's IBEX is up more than 25%, while Italy's FTSE MIB is just a shade under 24% higher from their end-July lows. Germany's DAX bottomed in early June, since when it has surged 18%. Overall, the Stoxx 600 index is up a little under 15% over that same period.

Most of those gains came directly as the result of European Central Bank President Mario Draghi's promise to do whatever is necessary to save the euro. The consensus reading has been that the promise means the ECB will buy bonds from the euro zone's beleaguered sovereigns in sufficient quantity to drive yields low enough that these governments will be able to fund themselves.

Sure enough, Italian and Spanish bond market yields dropped sharply and their equities soared.
Implicit in the equities market reaction was that a considerable amount of euro collapse was built into prices. Not only would an unwinding of the euro zone cause serious near term financial market trauma and economic slump–it's been estimated that economies would suffer considerably more than they did following the Lehman Brothers bankruptcy–but the benefits of monetary integration would be lost. So a decrease in those risks is clearly good for future profits.

The ECB has already been making waves and stirring markets this week by coordinating a global central-bank liquidity pump and sending signals about perhaps/maybe/possibly lending to the IMF to lend to other countries. Now, many market watchers expect the central bank to cut interest rates at its meeting next Thursday. Mr. Gartman, however, has his eye on a bigger prize: dare we say quantitative easing?

“The strains in the [Irish] banking system are intensifying, with growing reliance on European Central Bank liquidity, and Ireland appears to be under mounting pressure from elsewhere in the euro zone to ask for assistance,” HSBC said in a note. “There is ongoing concern that, if the Irish situation is not contained, the contagion risk will persist.”

Irish yield spreads were trading tighter in early trade, at 5.61 percentage points at 0809 GMT, down 0.48 percentage points from Friday. The tightening was more moderate in Portuguese bonds, whose yield spreads, calculated from bid levels rather than from mid-market levels, are trading at 4.38 percentage points from 4.47 percentage points Friday.

“It’s a continuation of Friday’s market action,” said Nordea’s senior analyst Jan von Gerich, referring to the joint statement of finance ministers of Germany, France, Italy, Spain and the U.K. The joint statement said that debt issued before mid-2013 would be unaffected by changes to the European Union’s bailout program. The statement calmed markets as intended.

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